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Gold holds its value for long periods, it’s liquid, and it’s a great hedge against market recessions, so there’s no surprise it’s still such a popular choice with investors. However, cryptocurrencies like Bitcoin have arrived on the scene in a big way, as a new, alternative form of currency, which can also be used to hedge against recessions. Joel Nagel looks at the reasons why Bitcoin is giving gold a run for its money when it comes to choosing a long-term investment hedge and asks the question: might Bitcoin just be the new digital gold?
History of the Currencies
Gold has been valued and traded by humans for millennia. In modern times it has long been considered as a secure, reliable investment. It’s also an asset that has historically performed well during market corrections and, significantly, during major financial recessions.
While cryptocurrency as a concept is far newer, the results for investors using it as a recession hedge are, so far, very promising. It also shares a lot of characteristics with gold: Bitcoin, for example, derives its value from its limited supply, coupled with consumer demand and a certain level of prestige. In its infancy it may have been seen as something of a novelty, but as digital assets become increasingly widespread, currencies like Bitcoin have gained real legitimacy and value for investors.
In the unpredictable landscape of 2022, what makes more sense, investing in gold or cryptocurrency?
Cryptocurrency or Gold? It all depends on individual investment goals
The better investment opportunity depends, to a large extent, on an investor’s tolerance for risk. If their objective is a safe and reliable asset, with fast and predictable profits, then sticking with gold may well be the better option. However, for investors who are less concerned with the time frame, and perhaps willing to take a bigger risk with their investments in return for a greater return, cryptocurrency presents a very exciting opportunity. It’s worth taking a look at their relative characteristics in a little more detail to decide what’s right for you…
Characteristics of Gold
Gold’s long and reliable history, coupled with its scarcity, are factors that make it popular with investors—most major funds and institutions allocate some of their funds to gold.
The asset has tended to maintain its value through recessions, including the Great Recession (whereas Bitcoin wasn’t around to be tested). In fact, it even rises in value when financial crises threaten, as investors sell stocks and purchase gold, making it a very strong inflation hedge.
It’s also a great asset to move in and out of quickly, with very low chances of it losing value in the short term. As a liquid asset, gold also allows an investor to reallocate their portfolio more rapidly when there are fluctuations in the market, which helps to make it a safe option.
Gold does have its drawbacks, however. Unlike investment in stocks, for example, it doesn’t pay dividends, so it is very much a ‘safe haven’ rather than an income source. Additionally, storing large quantities of physical gold is difficult which creates additional expense and it’s not always easy to verify the purity of gold—or the legitimacy of its source.
Characteristics of Cryptocurrency
Cryptocurrencies also represent an emerging option as a ‘store of value’. The first reason for this is scarcity: While increasing the amount of gold in circulation is difficult, Bitcoin is even scarcer (with a maximum number of Bitcoins set at 21 million, of which around 19 million have already been ’mined’), which helps to preserve its value and makes it an attractive asset for many.
Another factor to consider is durability. There’s no denying that the cryptocurrency market is volatile over the short-term and can be subject to unpredictable factors like media coverage and hype. However, Bitcoin—the world’s largest and most established cryptocurrency—does have a record of building and maintaining value over its short history. During the short financial crisis caused by COVID-19 (the first major economic test of Bitcoin’s lifetime), the currency performed exceedingly well. In addition, that very volatility is the thing that can make it an interesting option for the more speculative investor.
For some investors, the added privacy and security that comes with cryptocurrency is a major advantage. Bitcoin, for example, is effectively ‘digital cash’. Dealing in it has no requirement for an investor’s personal information, which removes the chance of fraudulent transactions or stolen personal data. There is also no involvement from banks, governments, or other central authorities, which is a boon for some—particularly during and after a financial crisis, when people are more likely to want a private and decentralized option for investment. On the other hand, this lack of regulation may make some investors feel uneasy about cryptocurrency.
One more thing to consider is the revolutionary blockchain technology behind cryptocurrencies, which transforms the way transactions take place, making them incredibly secure and allowing great maneuverability. Obviously, as a physical asset, the storage and physical transportation of gold is resource intensive, whereas Bitcoin is entirely digital and transferring it is quick and affordable.
The Best Investment for an Unpredictable World
Gold vs Bitcoin: It’s easy to see why the new contender is giving the oldest currency a run for its money. The two types of assets share a lot of characteristics which make them both strong investment choices: they are both rare, they are both easy to purchase and dispose of, they are both traded in liquid markets and they both demonstrate resilience in the face of recession.
Gold remains the safest option for investors who are risk-averse and whose priorities are wealth preservation. Bitcoin is unquestionably more volatile as a currency. However, as cryptocurrencies become increasingly established, their fungibility and other digital characteristics, which make their trade, exchange, and maneuver incredibly rapid, is making them more and more attractive as an alternative. And of course, coupled with that higher risk profile comes the potential to reap huge profits. Finally, its low correlation to traditional assets—including gold—mean diversifying into a currency like Bitcoin could be a very smart move.
ABOUT JOEL NAGEL
United States-based attorney and Chairman of Caye International Bank, Joel Nagel, specializes in international corporate transactions and foreign commercial legal structures. With over 28 years’ experience, Joel is managing partner and founder of well-established US-based law firm Nagel & Associates. Working with corporate clientele in diverse regions of the world, Joel Nagel is an expert on asset protection for high-net-worth individuals and international corporation structures.
Website: Joel Nagel (joel-nagel.com)
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.